Good debt versus bad debt

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Credit can quickly turn into a debt trap, if we start to use it for day-to-day living on items we could easily save for. Then good debt becomes bad debt.

How to get out of debt in an uncertain COVID-19 world

  • Payment relief options during COVID-19
    • Local banks have all announced payment relief options to customers who cannot afford to meet their instalments; however, you need to specifically request this option – it is not automatic.
    • It is important to note that banks are currently only offering this to customers who were in good standing prior to the lockdown.
    • If you do select the payment holiday, this will not affect your credit score as it will not be viewed as a default.
    • Before you sign up for a payment holiday, it is essential that you speak to your credit provider to make sure you understand the implications.
  •  Debt counselling
    • Debt counselling is where you select to go under debt review. While this may carry a stigma or be viewed as a ‛failure’, it is better than waiting to default and having a judgement taken against you.
    • Once you enter debt review you are protected from legal action by creditors and a debt counsellor provides a court-issued agreement in terms of a repayment plan.
    • In debt counselling, all the relevant fees are built into this monthly repayment amount, therefore the consumer pays a single amount per month.
    • Once under debt review you may not apply for any credit until all the debts, as per the court order, are settled.
    • Upon finishing the program, the debt counsellor will issue a clearance certificate confirming that all the accounts listed under the debt counselling agreement are paid up.
    • The debt counsellor will ensure that the credit bureaus receive the certificate.

Always stick to a regulated credit provider for a loan  

If you are at your wits’ end or experiencing an unforeseen emergency that requires you to take out a loan, it is very important that do your homework first.

There are regulated lenders and those who are not regulated.

Any company that operates within the framework of the law and National Credit Act, like banks, are regulated and are required by law to extend credit responsibly to consumers.

Mashonisas (which means “to sink”), or otherwise known as “loan sharks” are unregulated, and lend to desperate consumers, without compliance with the National Credit Act (NCA).

They charge exorbitant interest and fees and have questionable collection practices.

Rather choose to improve your credit record over time, then enter a contract with an unregistered lender just to avoid credit checks.

Tips to consider when you take out a loan

Here are some tips to consider when taking out a loan.

1.    Calculate your affordability and stick with only what you need

Don’t borrow the full amount you qualify for, if you don’t need it all.

2.    Get your free credit report

Whenever you apply for a loan or any form of credit, the creditor will interrogate your credit report first.

This informs them whether to extend you the credit or not and at what interest rate.

3.     Understand your credit score

Your credit score is based on factors such as your level of debt, and how timeously you pay your bills.

Credit providers use your credit score to determine whether you qualify for a loan and how much interest you should pay.

A high credit score indicates a low-risk borrower, while a low score means a high-risk borrower.

4.    Know the interest rate on your loan

The interest rate on a loan is effectively the cost of the loan. The higher the interest rate, the more expensive it is to service that loan.

5.    Stick to your payment plan

Take a look at your budget and either scale back on your “wants” or find a way to generate extra income so you can direct some of those funds towards paying off your loan.

To speed up your loan payment, you can opt to pay extra every month, even if it’s just R100 – this small amount makes a big difference in the long run. Every little bit goes a long way to ensure you get out of debt sooner.

Your credit score depends on how diligent you are at paying your financial obligations, on time and in full. This means that every month, you should pay at least the minimum you have agreed to pay. If you don’t, this will negatively impact your credit score.

Helpful tool to pay off your debt: The snowball method

List all your debts, starting from the smallest debt to the largest debt.

Focus on the smallest debt first by paying a little extra money every month (remember, even what seems like a small amount, goes a long way) while paying the minimum payments towards all the other debts.

Once the smallest debt is paid off, roll that payment towards the next debt on the list.

This is called the snowball method.

Being ready to get things done – that’s Africanacity. And we’re here for.